Doing a Disservice to the Housing Industry

The CFPB has unleashed its first wave of Dodd-Frank inspired mortgage reform and it’s time to climb out of the bunker and survey the damage. The truth is it could have been much worse and the CFPB deserves credit for modifying at least some of the impact on smaller institutions. But mortgage lending is going to fundamentally change and not all these changes will be for the better. Against that backdrop, here are four things that I don’t want to hear citizens and policymakers complaining about five years from now, but I’m pretty sure I will.

1. Mortgages cost too much

This might seem to be a strange concern with interest rates lower than Congress’s approval ratings (ok, I exaggerate, almost as low), but I don’t see any way that the servicing regulations combined with qualified mortgage criteria won’t make providing mortgages more expensive. The CFPB has now promulgated more than 1,500 pages of new mortgage regulations in the last week. How many staff people are you going to assign to read and implement these requirements over the next year? How much is that going to cost you in man hours? Someone is going to have to pay for this.

We are already seeing the first signs of this: in December, the Federal Reserve Bank of New York released a report indicating that lenders aren’t passing on all the savings to their members in the form of lower mortgage rates. As foreclosure costs increase, compliance costs rise, and Fannie and Freddie aggressively move to make banks and credit unions take back mortgages, lenders are going to account for these costs by increasing the price of their mortgage products.

2. Only the big banks provide mortgages

While the CFPB deserves credit for seeking to exempt small institutions from some of these requirements, these exemptions as proposed don’t go far enough to justify the increased compliance burden imposed. It is perfectly legitimate for every financial institution in the country to ask if it is worth it to continue to provide to mortgages to their customers and members. The truth is that unless you benefit from an economy of scale, the compliance cost and/ or legal risk will mean that mortgages aren’t worth it. It is one of the great ironies of the Great Recession that those institutions responsible for causing it will be the ones to most benefit from the aftermath. This is already happening. Origination at JP Morgan Chase is going through the roof.

3. Too few people are getting mortgages

In the fairytale world of consumer advocates, you can strengthen underwriting standards and servicing requirements and still provide mortgages to everyone who wants to get one. Now for reality. . .the qualified mortgage mandate was inspired by a period of reckless lending, but it is being implemented in an environment where credit standards may already be too stringent.

Time for another reality check. You can’t respond to a crisis caused by a lot of people getting mortgages they couldn’t afford without passing regulations resulting in fewer people getting mortgages.

4. The Government is too involved in the housing market

This is true, but what is the alternative? If we did away with Fannie Mae and Freddie Mac tomorrow there would be virtually no secondary market to sell mortgages to and even fewer people would qualify for mortgages. I would like to see a world where the GSE’s don’t exist because I think the free market would ultimately fill whatever gap needed to be filled. But I am just a simple country lawyer writing a blog and not a CEO running a credit union. I know Fannie and Freddie messed up, but let’s come up with common sense reforms and stop pretending that GSE’s are going to cease to exist at some point.